Fed’s Duke: Reg Burden Quantifiably Tougher on Small Banks

Federal Reserve Board Member Elizabeth Duke, speaking at a banking conference in Georgia on Tuesday, said banks with fewer than $50 million in assets suffer a larger loss of return than banks between $500 million and $1 billion in assets when hiring employees to comply with the same regulation.

In prepared remarks posted on the Federal Reserve’s website, Duke said the Federal Reserve Bank of Minneapolis used 2011 bank call report data to estimate that banks with fewer than $50 million in assets would have to hire one additional employee, which would reduce ROA by 23 basis points for the median bank.

That decline could cause about 13% of the banks to go from profitable to unprofitable, Duke said.

Given the same increase in regulation, banks between $500 million and $1 billion would hire three employees to comply, but the median bank in that classification would only experience an ROA decline of about 4 basis points.

“While this is still a significant effect, very few banks in this group would go from being profitable to unprofitable as a result of the regulatory burden,” Duke told attendees at the Southeastern Bank Management and Directors Conference in Duluth, Ga.

Credit unions were not included in the Fed study.

Duke also said the Federal Reserve is monitoring the movement of deposits that may result from the Dec. 31, 2012, expiration of the Transaction Account Guarantee. Credit union trade associations say their lobbying efforts contributed to a banker-supported TAG extension bill dying in the Senate.

“So far have seen little evidence of deposits moving out of the banking system or, as some had feared, moving from smaller banks to larger banks perceived as too big to fail,” the Fed governor said.

Duke predicted that large banks will focus their efforts on large urban markets, allowing community banks to increase their competitive position in rural, suburban and small urban markets.

The Fed governor also touched upon another topic of interest to credit unions: small business lending. The Federal Reserve System has a project under way to try to improve its understanding of small business credit markets, she said, which includes community banks.

As of September 2012, banks with $10 billion or fewer in assets accounted for more than 98% of all commercial banking institutions but held less than 20% of industry assets. However, they held more than half of all outstanding small loans to businesses.

Small business loans represent nearly 20% of their total domestic lending and slightly more than 40% of their total commercial lending, she said.

At the other end of the spectrum, Duke said, banking organizations with more than $50 billion in assets accounted for less than 1% of institutions but held 75% of assets. While big banks hold almost 40% of outstanding small loans to businesses, they represented less than 5% of total domestic lending.

Duke also said that community bankers have been successful in making the case against “one-size-fits-all regulation.”

“I can't remember a time when I have seen more regulatory proposals drafted that differentiate between banks based on size or complexity,” she said.

She specifically cited Dodd-Frank provisions that exempt community banks, such as the Fed’s $10 billion asset threshold for a number of debit interchange restrictions and formal stress testing requirements. She also mentioned the CFPB’s recent qualified mortgage final rules that included safe harbors that exempt small institutions.

“We are encouraged by Governor Duke’s words of support for smart regulations that do not overburden community banks and prevent them from continuing to serve their customers and communities,” ICBA President/CEO Camden R. Fine said Tuesday in a release.